Law of Financial Institutions and Securities

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Lawof Financial Institutions and Securities

Economicfactors considered by the RBA to retain the cash rate at 2.0 percent

TheReserve Bank of Australia 2015 semiannual report includedrecommendations that opted for a standstill in the financial ratesawaiting further analysis of the financial market trend (Mckenna,2015). As per the semiannual Financial Stability Review presented bythe board in early March 2015, the ReserveBank of Australiaannounced the cash rate to be retained at 2%. The followingdiscussions highlight the key factors that led to the decision andapproach the Supervisory measures undertaken to emphasize prudentlending standards in Australia by the AustralianPrudential Regulation Authority(APRA).

Globaleconomic growth

Themost important economic factor taken into consideration by theReserve Bank of Australia is the general economic growth trends(Watt, 2015). Considering the recent global economic overview, thereis a slow steady growth than it was predicted earlier several majorglobal economies have reported growth over the past year. However,emerging economies are increasingly having trouble such as China,which has continued to moderate.


Commodityprices that had declined in 2014-2015 were a result of slow growth indemand (Watt, 2015). Increased supply in many sectors also influencedlow commodity prices and a general decline in Australia’s tradeconditions (Baker, 2016). It is worth noting that an increase insupply leads to lower prices, which may lead to aggregate tradeconditions, if a country does not find an external market for thesurplus.


AsBaker (2016) stipulates, financial market volatility is a criticaleconomic factor the RBA took into account in the decisions it took asa way to contain risks in the general economy and most importantly inthe housing market. As the RBA Governor Mr. Stevens (2016) statementillustrated, increased financial market volatility in 2015contributed to the slow growth as most participants continued to dealwith uncertainties emerging in the global economy and policyadjustments among key players. Not many players in major economiesare willing to take up more risks especially in lending (Watt, 2015).The trend adversely affected lending flexibilities in emergingmarkets. The Reserve Bank of Australia also expressed that fundingcosts for high-end borrowers diminished in 2015 while monetary policyworldwide remained accommodative.

Non-MiningIndustry growth

InAustralia, non-mining parts of the economy grew despite the shrinkingin spending in major industries such as mining investments. Accordingto Stevens (2016), this resulted in improvement in labor markets andpositively influenced lending to businesses in Australia.


Anotherdetermining factor is inflation, in this case, the reports indicatedlow rates and expected to remain low, not only in Australia butacross the globe in the coming years. These facts have footed theReserve Bank of Australian Board decision to maintain accommodativemonetary policy, low-interest rates and ensure supervisory measuresbeing introduced encourage lending standards. These measures aredeemed to help support demand growth, contain suspected risks in thehousing market (Stevens, 2016). As such, inflation is healthy as longas it does not reach unmanageable levels.

Supervisorymeasures to emphasize prudent lending standards in Australia


TheAustralian Prudential Regulation Authority (APRA) is the institutionmandated to regulate relevant financial institution through the CorePrinciple for Effective Banking Supervision (Core Principles)strategy in Australia. APRA ensures prudential regulated financialinstitutions operate safely to effectively fulfill the financialpromises they give to their customers and stakeholders in a stable,competitive financial system.

Functionsof APRA

Accordingto the APRA (2015) blueprint report, APRA main purpose is to usedifferent prudential frameworks to license and supervise institutionsin the financial system. The organization monitors banks using thepowers it draws from the BankingAct of 1959to provide validly binding prudential principles that banks shouldconform to. APRA acts under the Financial Sector (Collectionof Data)Act 2001 (FSCODA)to implement acounting principles for controlled institutions on howthey submit required reports. APRA supervises housing lendingstandards to authorized deposit-taking institutions (ADIs).

Thekey issues that APRA controls include ensuring that ADIs do notexceed the recommended higher risk housing lending shares, maintainADIs investor housing lending below 10% and that the banks shouldinclude interest rates buffer at a specific rate as recommended byAPRA (APRA, 2015). APRA has also been mandated by the government toact in accordance with the stipulated laws and regulations in bestpractice in its decision-making, policy creation, communicationprocesses to increase efficiency and transparency as well asminimizing the cost of compliance to regulated institutions.

APRAsupervisory measures

Throughthe government Statement of Expectations initiative, APRA has soughtto strongly emphasize of prudential supervisory programs aimed atensuring that risks being taken by regulated institutions areconducted reasonably and are bound by clearly identifiable andwell-managed policies. This has worked effectively using theestablished Enterprise Risk Management (ERM) policy. The ERM policyhas enabled APRA to easily develop a systematic and structuralapproach to identifying, assessing and monitoring risks involved inthe sector. In 2014, APRA approach to ADIs changed by outliningfurther steps to reinforce residential mortgage lending practices inAustralia (Mckenna, 2015).

Followinga historical prevalence of low-interest rates, high levels householddebts and improving competition in the housing market, the boarddecided to increase the level of supervisory oversight in 2015 andbeyond. The steps undertaken include monitoring high-risk mortgagelending such as high loan to income, high loan to valuation andinterest only loans. APRA also indicated to closely follow up themarket strengthening growth in lending property investors. A test toloan affordability to new borrowers is one way APRA intends to use tomeasure repayment capabilities using the 2% above the loan and atleast 7% as the floor lending rate for all loan products (APRA,2015). The APRA supervisory focused on lending standards are to beimplemented alongside the new interest-only lending reviews providedby the Australian Securities and Investments Commission (ASIC). TheAPRA approach was to take the heat out of the Australian propertymarket was mainly influenced by September 2015 fall in investor homeloans by 8.5%. As explained by Mckenna (2015), the APRA supervisoryfocused on monitoring the growth in individual ADI’s investorhousing loan packages that are above 10% per year. This was reachedafter consultations with CFR members, where a number of specificfactors were also taken into account including household incomegrowth and current market behaviors.

APRAalso introduced a mechanism in its supervisory approach that wouldconsider enhancing supervisory action on ADI’s which undertakerlarge volumes of lending in high-risk categories. This would alsoaffect ADI’s members who would proceed to increase higher risklending as a proportion of their total new lending (Stevens, 2016).In this case, high-risk loans comprise credits with high loan toestimation ratios, those with high obligation servicing levels,owner-occupiers based on prolonged interest periods as well as loansdescribed to be long term beyond normal durations that are usuallyoffered. In this case, the best prohibiting tool for owner-occupiersis the serviceability rule at 7% minimum rate (Mckenna, 2015). Theserviceability rule of 7% allows a government to prohibit risingloans.


Themain factors that led to the standoff by the RBA according to the RBAGovernor include the performance of commodity prices, financialmarkets volatility, non-mining industry growth and the shrinkingmining investments and most importantly inflation rates that hadremained low throughout 2015. The Australian Prudential RegulationAuthority (APRA) has maintained changes in the lending industry aswell as managed to provide adequate surveillance and guidelines toADI’s in the economy. The main functions of APRA include providinga regulatory framework and surveillance to all ADI’s members inAustralia’s financial sector ensuring the best policies have beendeveloped and implemented to enhance transparency and minimization ofthe costs of compliance by regulated institutions. APRA has ensuredreasonable risk taking by the regulated firms, increased supervisoryoversight in the sector, and monitored high-risk mortgage lendingactivities of the members of ADI. It has also introduced a test toaffordability to new borrowers using repayment capability measureusing 2% above the loan and at least 7% as the floor lending ratecutting across all loan facilities.

Impactof Australia becoming a cashless society

Withmore developed economies progressing closer to becoming cashlesssocieties, debates on the impact such a move will have on the societybecoming a major debate among socialists, economists andacademicians. Current problems in the society involving criminologyare mostly blamed on the untraceable nature of physical paper moneyin current economies. It is perceived that with more use ofelectronic money will eliminate common societal problems such astheft, tax evasion, time wastage on queues, fake cash circulation anddifficulty in cash management.


Themain motivation behind governments pushing for a cashless society issecurity reasons. Governments and supporters arguing for theelimination of tangible cash from the market argue that it will cutout the comfort for criminals. It is purported that when alltransactions are carried out electronically, it will be easier tomonitor suspicious activities making it easier to detect and monitorcriminal activities. Electronic transactions also create a papertrail hence making it easier for the government to track downcriminal activities. Electronic transactions data is fully recordedand kept forever, which can enable investigators to easily gatherevidence. According to Rogoff (2014), banning cash would end blackmarkets in Australia as every citizen will be subject to honest andtransparent transactions.


Theban on using cash in retail transactions in any society is a directattack on the people`s freedom of choice and property rights ofcitizens. A full shift to electronic currency directly introducesincreased surveillance to people`s activities that infringe theirprivacy as a basic civil liberty. As shay (2013) argues, electronictransactions are all traceable hence would eliminate the anonymity inthe transactions that people make (Rogoff, 2014). This may transformelectronic currency into a target of government agencies to trafficto interested parties such as the insurance industry, tax collectorsand fraud prevention squads. Electronic currency will create a troveof data in which if not carefully managed and controlled, may leadunlawfully access to people`s financial history.

Abandoninga century-old form of currency can easily lead to inflation,introduce risk premiums into bond pricing and result to adversemacroeconomic instabilities. Removing cash from the financial systemmay pave a way for alternative currencies (Drummond, 2015). Theseinclude non-official payment systems such as the Demi in Canada thatallows $20 bills to be split into two. Electronic currency is proneto cyber security risks such as cyber-attacks and infrastructureoverreliance (Health &amp Whitelaw, 2011). The introduction ofelectronic currency as the sole means of exchange in markets willlead to significant shrinkage in demand and treasuries will have toabsurd the loss.

Advantagesto the government

Theelectronic currency will eliminate anonymous transactions thatconceal criminal activities from the government. The electroniccurrency will enable the government and tax collection agencies toeasily follow money exchange trails and determine accurately owed taxto the government (Gomez, (2016). The electronic currency will helpthe government to eliminate underground economies, as alltransactions will be subject to taxes. The change will reduce thegovernment costs on law enforcement.

Advantagesto the financial sector

Throughelectronic currency, the government and the central bank can easilyintroduce lower interest rates with reduced deflationary shocks((Gordon &amp Gandia, 2014 Health &amp Whitelaw). The electroniccurrency will enable the central banks to easily convert electronicdeposits to zero and beyond. The electronic currency will give thegovernment a chance to introduce effective negative interest rates oncurrency to override inflation (Gordon &amp Gandia, 2014 Morley,2016). The financial sector will be able to uniformly and easilyevaluate the value of money to encourage holders to spend. Such moveswill make huge hoards less useful hence enabling the money to flow.

Disadvantagesto citizens

AsBonner (2016) warns, electronic currency is one of the ways thatgovernments intend to use to exercise powerful control over humanbehavior. Electronic money poses a threat to the fundamental humanbasic rights to privacy and freedom (Rogoff, 2014). Currently, thereis no evidence as to whether governments will refrain from takingadvantage of the immense control they will have over their citizens’information using electric currency and transactions. The electroniccurrency may increase the gap between the rich and the poor in termsof access to security. The rich may be able to secure privacy andprotection from exposure using corporate entities in undertakingtransactions (Gomez, 2016). For the poor people, the only way totransact will be through traditional banks in which they will have noabsolute anonymity. For the poor people, cashless transactions arestill not a reality.

Otherconcerns highlighted by Bonner (2016) stipulate the fact that thereare millions of people still not accessed by banks and cannot receivecredit due to their lack of involvement in the common financialsystem. According to Morley (2016) and shay (2013), a ban on cashwill directly and negatively affect poor people as they will leastbenefit from credit facilities and they will have to meet theunnecessary cost of transacting through electronic currency.Electronic currency exposes users to cyber security issues such ashacking (Rogoff, 2014). Hackers using computers and mobile devicescan easily access users’ personal information and sensitive dataunlawfully.

Thereare software’s in the black markets that can easily crack passwordsand encryptions in users’ accounts, credit and debit cards.Preventing such access requires the government and users to invest inmore secure systems and platforms that may increase the cost ofoperating electronic currency (Beck &amp Levine, 2008 Gomez, 2016).Overreliance on technology is the biggest challenge in electroniccurrency. Infrastructure setup such as access to telephone lines andthe internet may determine user`s capability to access their cashmake transactions (Drummond, 2015). The technology may also not workin rural areas and places that have not yet been put to the nationalnetwork grid. Citizens will not transact if they do not have accessto their phones, credit and debit cards or if they forget their IDs.

Importanceof electronic currency becoming a reality in the near future

Cashlesstransactions are an ultimate timesaver in undertaking any type oftransaction in the modern world. The use of paper and coins currencyis more becoming old fashion and only being left to the low class,less developed and the poor communities in the modern society(Drummond, 2015). People living in urban areas and cities, especiallyin developed countries, are already witnessing how easy and simple itis to transact seamlessly using electronic currency. The use ofelectronic currency is now considered safer than using physical cashin many places. It is easy to shut down a digital wallet if it iswrongly taken from the user Gomez, 2016). Every person’s identityis effectively verified and the authentication process is highlysecure that paper and coins currency where anyone with the cash cantransact.

Electroniccurrency increases convenience among users. Different functions caneasily be combined into a single platform such as using the samecredit or debit card to make transactions. This subsequentlyeliminates the need to carry bulky hard cash and in some instanceeven plastic cards (Beck &amp Levine, 2008 Morley, 2016). Paymentsare easily made using the cards or alternative systems such as amobile device. Lending and borrowing become easy as banks alreadyhave a trail of the spending behavior of their customers and canverify past transaction records to audit and determine the creditlevel (ABC, 2014). Electronic currency makes it easy to trade indifferent countries with different currencies as conversions areautomated in the systems being used giving users ample timeregardless of where they are in the world.


Developedcountries are already undergoing a transition from traditional cashfinancial systems into full-fledged cashless economies. Australia isamong the countries experiencing the wave of change with manycitizens signing up for electronic currency alternatives such ascredit and debit cards and mobile money transaction platforms.Electronic currency highly benefits the government and itsinstitutions especially in issues pertaining to public management,security and access to the financial activities. Electronic currencyhas its negative impact in the society such as infringing the basicpublic human rights of privacy and freedom. There are growingconcerns as to whether the government has the capacity to ensurethese rights are not removed and the electronic currency is keptanonymous just like cash. Despite the importance of these concerns,electronic currency is an unavoidable reality and it is now becomingan inevitable future financial system not only in Australia, but alsoin many other leading economies.


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